The De Beers Group

A Diamond Is Forever—But Can a Company Be?

2018.08

The De Beers Group: A Diamond Is Forever—But Can a Company Be?
The De Beers Group
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I. Taking control of the global diamond supply, rebranding diamonds

The De Beers Group monopolized the global diamond market for nearly 90 years following its establishment.

  • Diamonds are the hardest natural substance on Earth as the result of carbon atoms exposed to high temperature and high pressure. While their characteristic hardness has led to widespread industrial use at $10-20 per carat, diamonds have received much love for their beauty and scarcity as symbols of upper-class luxury. They hold great value as a gemstone separate from the concept of depreciation, as they take billions of years to form naturally.
  • Diamonds are evaluated by the 4Cs of quality: Color, Carat, Clarity, Cut. That said, there are many subjective factors that go into the criteria and evaluation itself, resulting in the price of a 1-carat diamond ranging from $1,000 to over $30,000. Small differences in categorical ratings can result in major differences for the final price. Moreover, one 2-carat diamond is sold at a much higher price than two 1-carat diamonds because prices increase dramatically with size due to scarcity.
  • However, rare minerals are not necessarily valued at high prices. Supply of a certain quality is needed for transactions to go through, for companies to spend money on marketing, and for customers to make informed purchases. Consequently, excessively scarce or uniquely colored minerals often fall in price.
  • Throughout the distribution process involving miners, diamond cutters, sellers, and customers, the price of a diamond increases more than (1)fivefold. The most profitable upstream is mining the gemstones and supplying to distributors/metalworkers, as the upstream rate of return usually exceeds 30%. Meanwhile, because more than half of the weight of the diamond is lost during the cutting process (i.e., the midstream), the company typically earns a 10-15% return.
  • De Beers was established in 1888 by Cecil Rhodes, a British businessman, mining magnate and politician in southern Africa. Rhodes, who had a diamond mine in Africa, consolidated other mining companies with funding from the Rothschild family. Rhodes named his company after two Dutch settlers and brothers, Diederik Arnoldus De Beer and Johannes Nicolaas De Beer, who had discovered the world’s then-largest diamond mine.
  • The increase in diamond output led to a gradual decrease in scarcity and the profitability of many diamond businesses, while a series of mines went bankrupt in South Africa due to the economic recession during World War I. De Beers reduced production by consolidating these companies and grew to become the dominant operator in the global gemstone market.
  • However, the company had a crisis during the Great Depression and was ultimately taken over in 1927 by Ernest Oppenheimer, the founder of Anglo America, the world’s leading mining firm. Since then, De Beers monopolized diamond distribution and made huge profits for about 60 years.

De Beers made diamonds the symbol of romance and true love with the slogan of the century: “A Diamond Is Forever.”

  • The diamonds sold by De Beers up to the start of the 20th century were mostly for engagement rings. Diamonds were merely luxury items at the time, and most people wanted to spend their earnings on something more practical. De Beers, which had previously focused on raising diamond prices by controlling the supply, started looking for ways to change public perception. It hired the ad agency N.W. Ayer & Son and started a massive campaign in the 1930s to establish diamonds as a symbol of romance and true love.
  • Through its advertisements, De Beers changed the public perception of diamonds from a luxury item to a necessity for all as a token of everlasting love. In doing so, the company led customers to consider diamonds alongside other products needed in everyday life.
  • Furthermore, De Beers had famous actresses and socialites wear its diamond rings to be photographed in public, inspiring ordinary women to want the diamond rings worn by celebrities. The company even released a guide on how much men should spend on engagement rings. The amount rose from a month’s worth in the 1930s, to two months’ in the 1990s, and three months’ in the late 2010s.
  • The demand for diamonds soared from its ad campaigns; De Beers hit a record high, marking a 50% increase in sales. Even so, De Beers wanted to create a symbolic and inspiring slogan that was more than a publicity stunt—something that could preserve the intrinsic value of diamonds while elevating them to a symbol of everlasting love. In 1947, Frances Gerety, a copywriter for Ayer, created “A Diamond Is Forever,” which continues to be considered one of the greatest slogans in the history of marketing.
  • By focusing on this slogan for over five decades, De Beers has left a clear impression to customers that “diamonds and their value are forever” and created an emotional attachment between customers and diamonds. Thanks to this successful marketing practice, the ratio of women who received diamond rings as their engagement rings rose from around 10% in the 1930s to over 80% in the 2000s.


II. Change from controlling supply to generating demand

In controlling the production and distribution of diamonds and thereby managing the quality and price, De Beers made customers perceive diamonds as a scarce and valuable gemstone.

  • In 1939, De Beers set the concept of 4C (Color, Carat, Clarity, Cut) as standards of evaluating diamond quality. Color denotes the color determined by nitrogen content; carat is the weight of the diamond; clarity is the transparency of the diamond; the cut is the polish condition that determines how much a diamond sparkles. 4C continues to be used as the standard for appraising diamonds. More recently, De Beers has added three categories—Fire, Life, Brilliance—to appraise diamonds in a detailed and objective manner.
  • Raw materials, being reliant on market conditions, fluctuate widely in prices according to supply and demand. Because such price fluctuations are fatal to maintaining the value of gemstones and luxury items, De Beers adjusted its supply according to demand, and established a single distribution channel to uphold the quality of diamonds in circulation.
  • De Beers created Central Selling Organization (CSO), comprised of 125 distributors and metalworkers, and granted each of them 10 annual bids that were renewable every 3 years. Bids worked on a “take it or leave it” basis, where De Beers selected the price and supply amount and members could either purchase certain diamonds without price negotiation or pass. Through CSO, De Beers could perfectly control the supply amount and price of diamonds, which matched De Beers’ marketing strategy in making customers perceive diamonds as a gemstone of everlasting value.
  • However, the discovery of new diamond mines in Russia, Australia, Canada, etc. in the 1980s led to a sudden increase in supply. To maintain influence over the market and the price of diamonds, De Beers purchased all diamonds from the newly discovered mines through CSO, preventing their distribution to the market. In doing so, De Beers’ gemstone inventory increased to $6 million in the late 1990s, which was about a year’s worth of the company’s sales.

As supply control became impossible following changes in the market environment, De Beers completely upturned its business strategy.

  • With the steady increase in diamonds from Russia and other newly discovered mines, it became impossible for De Beers with its financial capacity to (3)buy up all available diamonds. As the company lost its control over the gemstone market, De Beers’ market share plummeted down to 45%.
  • This was then followed by a number of big mining companies entering the diamond market. As big-name mining companies such as Alrosa, BHP Billiton, Rio Tinto Group, and Petra Diamonds began to add diamonds (a stable product) to their mining portfolios comprised mainly of variable raw materials such as nickel, De Beers’ market shares shot down even to the mid -30%.
  • Furthermore, De Beers also took a hit when it became international news that Sierra Leone, Angola, and other African countries were funding wars by mining and selling diamonds. Ever since, a quota system to limit the production and distribution of these “blood diamonds” was established through the efforts of the international community. Not receiving diamonds produced from local mines was a problem for De Beers, which was already losing control over the supply amount. Now, demand has become an issue too, with the company losing sales because customers could not distinguish whether or not the diamond was “ethically” produced (i.e., conflict-free) when trying to make a purchase.
  • Rapidly losing market control over gemstones, De Beers changed its business strategy to focusing on branding and generating stream demand through a consulting project with Bain & Company. To enter the downstream jewelry market, De Beers chose LVMH (Louis Vuitton Moet Hennessy, which has plenty of know-how in the luxury brand market) as its partner instead of gemstone specialty brands like Cartier and Tiffany. After launching a jewelry brand through a 50/50 partnership with LVMH, the De Beers Group officially entered the jewelry market in 2001.


III. (4)Rising to the challenge of new threats

Threats to the natural diamond market, namely synthetic and secondhand diamonds, have emerged.

  • Synthetic diamonds are chemically, physically, and visually almost identical to natural diamonds. Given that ordinary customers and even diamond distributors without special equipment are unable to differentiate synthetic and natural diamonds, questions about the eternal value of diamonds began to arise. The diamond market was met with crisis when lab-made diamonds began to be sold at 30-40% cheaper prices.
  • The rise in secondhand diamond transactions is also an area of concern for De Beers. If a customer resells the diamond due to divorce, the death of a partner, financial reasons, etc., most people receive only 10-20% of what they originally paid, which is even lower than the wholesale price. This is because diamond distributors don’t need to buy secondhand diamonds, much less offer higher prices, when they can buy new diamonds at wholesale prices; most distributors also lack the skill and equipment to accurately assess the value of diamonds on jewelry or identify synthetic diamonds, so they make very conservative offers to protect their business.
  • Additionally, even if they had a certificate of authenticity given to them with their purchase, not only was it difficult to authenticate the certificate itself, but it is also difficult for customers to buy diamonds at “standard” prices because jewelers and pawnbrokers always want to buy as cheaply as possible and sell at the most expensive price possible. Similarly, C2C trading rarely happens due to various trust issues.
  • In the process of not receiving a price offer at all or receiving a wide range of offers that don’t come up to even half the wholesale price, customers begin to doubt the intrinsic value of diamonds, losing the sense that “A Diamond Is Forever.” Customers with this experience never buy another diamond again, share their negative experience with those around them, and have a negative effect on the diamond industry as a whole.

De Beers is fighting alone to protect its claim that “A Diamond Is Forever.”

  • In response to the threats in the natural diamond market, De Beers started researching synthetic diamonds. De Beers started producing and selling synthetic diamonds for industrial use while focusing its research on synthetic diamonds for jewelry. After years of research, De Beers established the International Institute of Diamond Grading and Research (IIDGR) and started providing a natural diamond authentication service to its customers. It also developed and is now selling a diamond verification instrument.
  • Furthermore, De Beers introduced the Forevermark brand in 2008. By engraving its logo and a unique number on every diamond sold through this brand, the company now vouches for the diamond’s beauty, scarcity, and mining history. In doing so, De Beers is working to eliminate threats to the diamond market created and maintained by them, such as ethical problems related to blood diamonds and trust issues regarding synthetic diamonds.
  • The market for secondhand diamonds is expected to continually grow and eventually reach one-third of total diamond transactions. Meanwhile, De Beers has entered the secondhand diamond market as a new means of sourcing diamonds and preserving customers’ faith in diamonds’ intrinsic value. Since establishing the International Institute of Diamond Valuation (IIDV) in 2014, the company has worked especially hard to optimize customer experience, such as suggesting appropriate market prices through a transparent evaluation process and using its brand as a foundation to provide the best customer service.

There are two lessons we can learn through the De Beers Group.

Lesson #1: Great marketing that adds value to a product can create a whole new market.

  • One could argue that the value and appeal of diamonds come not from their physical properties or scarcity, but the slogan that “A Diamond Is Forever.” De Beers transformed diamonds from a bourgeois luxury item to an item with lasting value, a must-have for an important life event.
  • While controlling the supply to expand alongside demand, De Beers managed diamond prices so that they would not continually fluctuate like those of other raw materials. This matched the company’s marketing strategy in establishing the diamond as a jewel rather than a mere raw material for industrial use.

Lesson #2: Businesses can only survive by continuously changing with the times.

  • After successfully popularizing a luxury item, De Beers monopolized upstream profits by keeping a tight rein on the supply, but did not change or challenge itself during its decades-long monopoly. Despite the emergence of new large-scale diamond mining companies, De Beers concentrated only on controlling the supply through the unsustainable method of buying out the surplus.
  • When De Beers realized that controlling the supply was no longer possible in the face of decreased profitability and increased inventory, the company belatedly diversified its profit portfolio by entering the downstream jewelry market. It has also started engraving brands and unique numbers on its products to ensure product differentiation and quality control.
  • In response to the sale of synthetic and secondhand diamonds as well as other threats to its business, De Beers now produces and sells synthetic diamonds while working to preserve the value of natural diamonds through IIDGR and IIDV. The company is working to improve customer experience and striving for change overall.

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